Definition of mortgage certificate is a financial instrument issued by a financial entity in which a debt or other type of obligation is recognized by paying a fixed interest or a fixed return for it and that has as investment guarantee all or part of the mortgage loans of that entity.
These are fixed income securities issued exclusively by credit institutions. They are usually medium-term issues and have different modalities in terms of interest rate and repayment conditions. These mortgage titles can be registered, to order or to the bearer.
The issuing entity reserves the right to early amortize part or all of the issue during its life, in accordance with the provisions of the legislation of each country. These entities usually give liquidity to these securities, that is, they provide purchase or sale counterpart to investors, provided that the volume of securities they have in their portfolio does not exceed the legal limit of 5 percent of the volume issued.
How do mortgage bonds work?
The mortgage bonds have a double guarantee:
- The first is that of the issuer.
- The second is the preferential right of the escrow holders over the mortgage portfolio compared to the rest of the creditors.
There is a legal requirement that prevents the balance of mortgage bonds from exceeding 80 percent of the eligible portfolio. There are also higher-risk mortgage bonds, such as those issued by American banks guaranteed by high-risk mortgages, also called subprime.
Characteristics of the mortgage certificate
- The Cédula Hipotecaria is issued in a public deed and with it a financial institution seeks financing, paying interest for it thanks to the capital it receives.
- Generally, they are titles that are usually amortized over a period of 1 to 3 years.
- There are analysts who consider it as a money market asset and others who do not, since they are not so easily convertible into money when compared to a repo or a simultaneous operation.
In addition, they are simple products as long as it is correctly detailed what type of guarantee the bank offers in terms of the quality of the mortgage loans it supports. Although it is true that it is a relatively liquid financial asset, it does not guarantee the payment of the profitability or its principal capital if there is a problem with the entity and its mortgage loans, due to non-compliance in the payment of these, therefore, it is important to know the degree of hierarchy in the collection of this title in the event that a financial entity declares bankruptcy.
Types of mortgage certificate
There are two types of mortgage certificate depending on the guarantee they provide to the investor:
- Global Guarantee: The guarantee of the mortgage certificate is made up of all the mortgage loans of the entity. In theory, this coverage is broader and more secure, although this is not always the case.
- Special guarantee: The guarantee of the mortgage certificate is made up of a part of the mortgage loan portfolio of the financial institution. In this regard, it can include guarantees of higher or lower credit quality, therefore, it is very important to analyze it.
Types of Covered Bonds by country
The most important Covered Bond classes in each country are listed below:
- Austria - Fundierie Bankschuldverschrelibungen.
- Germany - Jumbo Piandbrief.
- France - Obligations Foncieres.
- Spain - Cédulas Hipotecarias and Cédulas Territoriales.
- Luxembourg - Lettre de Gage.
- Ireland - Asset Covered Security.
- UK - UK Covered Bonds.
- Sweden - Sakerstallda Obligationer.
- Denmark - Saerligt Daekkede Realkreditobligationer.
- Portugal - Hipetacarias Obligations.
- Holland - Dutch Covered Bonds.
- Italy - Obbligazioni Bancarie Garantite.
- Finland - Ioukkovelkakina.
- Canada - Canadian Covered Bonds.
- US - US Covered Bonds.